Flurry of new issuances being used for repaying debt rather than expansion, say bankers

After a quiet six months in the second half of last year, the local bond market has roared back to life this year, with issuances returning in strength and investors snapping them up with fervour.

Persistently low interest rates are driving both supply and demand. Despite some recent central bank hikes, interest rates are still close to historic lows.

Companies see such bonds as a good way to raise funds at a low interest rate, while investors seeking higher returns cannot get enough of them, especially high-grade bonds from big corporate names that they trust.

Especially in favour are hybrid bonds such as perpetual securities, a bond-like instrument that offers a higher coupon rate than a straight bond. It has no maturity date and holders have no voting rights.

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So far this year, companies have issued some $13 billion worth of bonds, just slightly above the $12.8 billion issued in the first half of last year, noted DBS Bank's head of fixed income, Mr Clifford Lee.

Issuers have mostly been blue-chip names, including Singapore Airlines, Mapletree Investments, Keppel Reit and City Developments.

Sembcorp Industries and Wing Tai Holdings joined the fray last week. Sembcorp issued $200 million worth of 3.7 per cent subordinated perpetual securities, and Wing Tai, $150 million worth of 4.08 per cent senior perpetual securities.

"The second half of last year was when we saw the peak of credit stress in the offshore and marine sector, and so the market seized up," noted Mr Lee. "The markets have stabilised somewhat and hybrid and repeat issuers are back in favour. A reduction in bond supply in the second half of last year also means that investors have ample liquidity to deploy now."

OCBC Bank credit analyst Nick Wong added that the market expects interest rates to remain low for a while more, which is driving investors' hunt for higher yields.

"Issuers have sought to capitalise on this by issuing bonds with longer maturities as well as perpetual securities, providing investors with higher coupons in exchange for longer duration," he said.

" That way, issuers are able to lock in the current relatively low financing rates. Furthermore, perpetual securities are also accounted for as equity on the balance sheet, which allows issuers to keep their leverage profile in check."

Bankers noted, however, that the flurry of bond issuances is not necessarily a reflection of expansionary business activity.

"Most of the issuance proceeds so far this year have been used to refinance existing debt and general corporate purposes. Not much issuance was used to fund expansion plans," said UBS Wealth Management's Asia bonds strategist Devinda Parathanthri.

This might, in turn, constrain the supply of bonds in the coming months, he added.

"The demand for bonds is ample. The key is to get companies to issue them, and issuance supply is dependent on sentiment. If business sentiment improves, that would generate confidence to expand, which would lead to more issuances."

Still, some bankers believe there will be a steady supply of bond issuances.

United Overseas Bank's head of group investment banking, Mr Edmund Leong, said: "We believe that the widely expected interest rate increases in the US are unlikely to affect bond issuances in Singapore due to favourable local market conditions. We also continue to see over-subscribed bond issuances here, which imply that there is still pent-up investor demand for quality issuances and higher-yield assets."

"Valuations for better issuers are somewhat pricey. Investors should focus on credit quality and avoid chasing yield at the expense of fundamentals. We like selected banks' subordinated debt and corporate perpetuals of stronger issuers."

A version of this article appeared in the print edition of The Straits Times on June 26, 2017, with the headline 'Firms rush in to issue bonds on low interest rates'. Print Edition | Subscribe

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